Do Parents Matter? Effects of Lender Affiliation through the Mortgage Boom and Bust

35 Pages Posted: 1 Nov 2010 Last revised: 21 Feb 2014

Date Written: February 20, 2014

Abstract

It is widely acknowledged that the 2007 mortgage crisis was preceded by a broad deterioration in underwriting diligence. This paper shows that this deterioration varied by the industry affiliation of mortgage lenders. Loans issued by homebuilders and standalone lenders were significantly less likely to default than loans issued by depository banks and affiliates of major financial institutions. I argue that homebuilders and standalone lenders had the least financial capacity to hold mortgages, and their resulting need to sell loans quickly on the secondary market forced them to issue safer loans. Tests of other explanations, including differences in information and incentives to avoid foreclosure externalities, receive little support. This study highlights a novel means by which firm boundaries influence firm adaptation to changing market conditions, by defining the boundaries of the internal capital markets and hence the relative constraints of constituent units.

Keywords: Organization, incentives, corporate scope, mortgages, securitization

JEL Classification: D21, D23, G21, L22, L25

Suggested Citation

Gartenberg, Claudine Madras, Do Parents Matter? Effects of Lender Affiliation through the Mortgage Boom and Bust (February 20, 2014). Available at SSRN: https://ssrn.com/abstract=1700868 or http://dx.doi.org/10.2139/ssrn.1700868

Claudine Madras Gartenberg (Contact Author)

Wharton ( email )

The Wharton School
Philadelphia, PA 19104-6370
United States
2158987755 (Phone)

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